In late 2008, there was an economic “crash” in the stock-market caused by many contributing factors. One of these factors was the mortgage companies holding mortgage notes that were not being repaid. During the late 1980’s and early 1990’s, the government pressed the idea that as part of the American Dream in a time of economic prosperity, as many Americans as possible should own their own homes rather than pay monthly rent expenses. Mortgage loans were made by banks to individuals who did not have the income or assets to repay the loans. The qualifications to receive a loan became more relaxed and plans were created to allow people to get into a mortgage at a low interest rate that increased or “ballooned” in subsequent years. Once the
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According to a July, 2009 article in “The Wall Street Journal” written by Stan Liebowitz, the largest common factor in home foreclosures is negative equity. This situation occurs when the home owner has made a very small down-payment or no down-payment at all when initially purchasing a house. Most mortgage payments in the early years of a mortgage term are made up of interest, so the home owner does not initially develop much equity. Then, if the homeowner comes upon hard times or loses his job, as described in the previous paragraphs, he does not find it difficult to walk away from the home. Mr. Liebowitz believes that our nation will see a significant reduction in mortgage foreclosures only when housing prices stop falling and unemployment stops increasing. The government is spending money in an effort to help the foreclosure crisis, but Mr. Liebowitz considers its measures ineffective. The Federal Reserve has successfully kept mortgage interest rates low, but this has resulted in more refinancing, not home purchasing.
In addition, another government plan has focused on reducing obligation ratios [the amount of income devoted to house payments] from 38% to 31%, but Mr. Liebowitz’s research has shown definitively that mortgages with the lower obligation ratios did not result in lower foreclosure rates. What is needed, according to “The Wall Street Journal” article is stronger underwriting standards for mortgage companies, especially greater